Why financial statements matter
A business broker's summary is marketing. The financial statements are evidence. Before you make an offer, you need at least three years of profit & loss statements, balance sheets and BAS lodgements. These documents let you verify revenue, spot inflated expenses, calculate true owner earnings and stress-test whether the business can survive a downturn.
In Australia, private businesses with turnover under $50M do not have to lodge audited accounts with ASIC. That means the figures you see are prepared by the seller's accountant — or the seller themselves. Your job is to read them like a sceptic, not a cheerleader.
Profit & Loss Statement
The P&L shows revenue, cost of goods sold (COGS), operating expenses and net profit over a period. For a buyer, the most important line is not the bottom-line net profit — it is EBITDA (earnings before interest, tax, depreciation and amortisation) or, for smaller deals, SDE (Seller's Discretionary Earnings).
Key checks
- Revenue trend: flat, growing or declining over 3 years?
- Gross margin stability: if it swings wildly, pricing or COGS control is weak.
- Expense ratio: rent, wages and marketing should sit within industry norms.
- Add-backs: sellers love to "add back" personal expenses. Scrutinise every one.
Balance Sheet
The balance sheet is a snapshot of what the business owns (assets) and owes (liabilities) at a single point in time. It reveals working capital health, debt load and whether the business is solvent.
Assets to inspect
- Cash on hand
- Accounts receivable (who owes money and for how long?)
- Inventory (is it sellable or stale?)
- Plant & equipment (what age and condition?)
Liabilities to inspect
- Accounts payable (who is the business late paying?)
- Bank debt and leases
- Tax liabilities (GST, PAYG, super)
- Provisions for leave and long-service leave
Cash Flow Statement
Profit is an opinion; cash is a fact. The cash flow statement tracks actual money moving in and out across operating, investing and financing activities. A business can be profitable on paper and still run out of cash.
Look for operating cash flow that consistently exceeds net profit. If operating cash flow is lower than profit, the business may have collection problems, bloated inventory or aggressive revenue recognition. Negative operating cash flow for two years running is a hard stop unless you know exactly why and have a fix.
Red flags that should pause the deal
Revenue growing but cash flow flat or negative — possible fictitious sales or collection issues.
Gross margin improving while industry peers are flat — check if COGS has been understated.
Sudden spike in 'other income' or 'consulting fees' in the year before sale — possible add-back engineering.
Balance sheet missing a current tax liability line — speak to the accountant immediately.
Inventory rising faster than revenue — dead stock may be inflating asset value.
Related-party loans that are forgiven or swapped for equity pre-sale — a classic value shift.
Document checklist
- Last 3 years of full financial statements (P&L, balance sheet, cash flow)
- Year-to-date management accounts for the current financial year
- Last 4 quarters of BAS statements lodged with the ATO
- Detailed general ledger for the last 12 months
- Aged receivables and payables reports
- Inventory listing with age analysis
- Lease agreements and equipment finance schedules
- Employee roster and wage summary
Ready to stress-test the numbers?
Upload the seller's financials and get EBITDA, ROI, payback period and a risk score in under 60 seconds.